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Knowing your investments

The Star Online - Tapping the 50 Plus Market by Carol Yip

By Carol Yip
Saturday August 22, 2009

MALAYSIANS’ faith in local banking products has not been affected despite the recent fiasco in Singapore, where banking clients lost over S$400mil because they had invested in Lehman Brothers-linked structured credit notes or products.

Observers say there has been little loss of confidence in Malaysia because local banks are perceived to be well-regulated.

Nevertheless, sound education for investors is said to be key in averting such episodes as financial institutions continues to innovate with products to stay ahead of competition as well as to cater to the different investor needs.

Singapore’s central bank blamed inadequate training of salesmen and poor risk reporting for the losses, which was incurred after Lehman fell in September 2008. Lehman was a guarantor of some of the notes, known as mini bonds.

Its collapse caused the notes to default or redeem early for significantly less than the principal amount.

In its report on the mis-selling, the Monetary Authority of Singapore (MAS) found that the notes were sold to inexperienced retail investors or investors who had asked for conservative portfolios.

Despite the notes’ inherently risky nature, the financial institutions, which are now banned from selling these products, had failed to make sure that their sales teams fully understood the nature of the notes. In some cases, they had misrepresented to investors the risk involved in the notes.

“The risk ratings assigned to some Lehman-linked investment products sold by the firms in Singapore were inconsistent with risk warnings stated in the prospectus and pricing statements,” the MAS reported.

“Several of the firms also did not provide their sales people with accurate and complete information about the notes, or took insufficient steps to ensure staff were properly trained in the marketing and sale of the Lehman-linked notes.”

Six of the institutions involved were brokers who should have conducted due diligence on the products before selling them and failed to do so, MAS found.

Mini bond products have also drawn regulatory attention elsewhere in the region.

Affected investors in Hong Kong, Taiwan and Indonesia have recently expressed outrage that the bond-like products they bought were actually complex derivatives that led to huge losses for many of them.

Jeremy Tan, a licensed financial adviser with Standard Financial Planner Sdn Bhd, notes that exposure to structured products among investors in Malaysia is limited as only a few banks in Malaysia offer structured products.

“In addition, financial institutions in Malaysia offering such products have been prudent in providing information and prompting customers with underlying qualification in terms of the features of the products,” he adds.

Abacus for Money chief executive officer Carol Yip agrees that the number of disgruntled investors locally is minimal as local banks are well-regulated and does not offer these products.

“Singapore, on the other hand, is an open market with a lot of exposure. Hence, they offer all these innovative products,” she notes.

However, MyFP Services Sdn Bhd financial planner and managing director Robert Foo opines that many Malaysians who have been investing through Singapore for offshore funds are now more concerned about investing in any type of structured products.

“In a sense, I think they are not so easily influenced by large or global bank’s branding and perceived stability and competence,” he says.

He believes that to a certain extent, more investors are less trusting when dealing with banks with regards to products being sold to them.

Meanwhile, Great Vision Financial Advisory Sdn Bhd head of financial services Phang Kar Yew says local investors have generally become very conservative since the start of the US subprime crisis and are mainly opting for government-backed or guaranteed investments such as the Amanah Saham Malaysia and Amanah Saham Wawasan 2020, both managed by the government-linked Permodalan Nasional Bhd.

“News from various sources globally does affect local investor sentiments as Malaysia’s financial sector is becoming more liberalised,” Phang adds.

Yip of Abacus for Money stresses the importance of fundamental financial knowledge before investing.

She says there should be an institution in place to provide financial education for the investing public in order for them to invest in the various types of complex products or to generally make sound investments.

“More importantly, the educators must be separate from those promoting the products to avoid bias or conflict of interest,” she adds.

She argues that local banks should not be restricted from selling more innovative products because more sophisticated investors will require more refined financial instruments. As such, it would be unfair to deprive these segment of investors.

Instead, it is crucial that the banks continue to be regulated closely.

Tan of Standard Financial Planner says that instead of tightening the banks’ sale of investment products, consumers must be made aware that all investment products carry risks – country sovereign risks, market risks as well as currency risks.

“Consumers should understand the underlying risks adhering to each investment products, including structured products, capital-guaranteed and capital-protected products,” he says.

Foo of MyFP Services sums up that whether or not an investment is appropriate depends on whether adequate and complete information has been properly provided to the banks’ customers and whether these products complement their financial situations and needs.

“As for how investors can prevent themselves from falling into the trap, a basic word of advice is, if you don’t understand how the product works to earn a return for you, don’t get in. I don’t just mean casually knowing what asset class your investment money is placed in. I mean, how does the fund or product actually make money for you and does it make sense,” he says.

“Do not just look at the charts and other seemingly convincing data placed in front of you, which attempts to convey that this is an opportunity you should never miss.”

Carol Yip is a personal financial coach who is founder and CEO of Abacus for Money.

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